Skip to main content
SpringerLink
Log in

U.S. petroleum consumption behavior and oil price uncertainty: Tests of cointegration and parameter instability

  • Articles
  • Published:
Atlantic Economic Journal Aims and scope Submit manuscript

Abstract

This study utilizes cointegration theory to correctly characterize U.S. petroleum consumption behavior. Initial estimates show the absence of any long-run, unique relationship among petroleum consumption, real income, and relative prices. However, the introduction of oil price uncertainty into this relationship shows the presence of a cointegrating relationship. Oil price uncertainty was introduced in two ways, namely, as an exogenous I(1) variable and as a regressand. Estimates of the cointegrating relationship are obtained using a variety of techniques such as the Johansen system, the Phillips-Hansen, the Stock-Watson, the Park canonical cointegrating regression, the Phillips spectral, and the Engle-Granger test procedures. Parameter instability of the cointegrating relationship is tested using methods discussed in Hansen [1992] and Hansen and Johansen [1993]. While previous studies in this literature have yielded mixed results on the issue of cointegration and ignored tests for parameter instability of the cointegrated systems, this study has presented new evidence on an empirically stable petroleum oil demand function.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

References

  • Andrews, Donald W. K. “Heteroskedasticity and Autocorrelation-Consistent Covariance Matrix Estimation,”Econometrica, 59, May 1991, pp. 817–58.

    Google Scholar 

  • Arize, A. C. “The Effects of Exchange-Rate Volatility on U.S. Exports: An Empirical Investigation,”Southern Economic Journal, 62, July 1995, pp. 34–43.

    Google Scholar 

  • Bentzen, J.; Engsted, T. “On the Estimation of Short- and Long-Run Elasticities in U.S. Petroleum Consumption: Comment,”Southern Economic Journal, 62, 1996, pp. 783–7.

    Google Scholar 

  • Bernanke, B. S. “Irreversibility, Uncertainty, and Cyclical Investment,”Quarterly Journal of Economics, 1983, pp. 85–106.

  • Charemza, Wojciech W.; Deadman, Derek F.New Directions in Econometric Practice, Brookfield, VT: Edward Elgar, 1992.

    Google Scholar 

  • Citibank.Citibase: Citibank Economic Database, New York, NY: Citibank, 1996.

    Google Scholar 

  • Darrat, A. F.; Gilley. O. W.; Meyer, D. J. “U.S. Oil Consumption, Oil Prices, and the Macroeconomy,”Empirical Economics, 21, 1996, pp. 317–34.

    Article  Google Scholar 

  • Energy Information Administration.Monthly Energy Review, various.

  • Engle, R. F.; Granger, C. “Cointegration and Error-Correction: Representation, Estimation, and Testing,”Econometrica, 55, March 1987, pp. 251–76.

    Google Scholar 

  • Federal Reserve Bank of St. Louis. <http://www.stls.frb.org/fred/abotfred.html>, 2000.

  • Ferderer, J. P. “Oil Price Volatility and the Macroeconomy: A Solution to the Asymmetry Puzzle,” mimeo, Clark University, 1992.

  • __. “Oil Price Volatility and the Macroeconomics, 18, 1, Winter 1996, pp. 1–26.

    Google Scholar 

  • Goldberger, A. S.Introductory Econometrics, Cambridge, MA: Harvard University Press, 1998.

    Google Scholar 

  • Hansen, B. E. “Tests for Parameter Stability in Regressions with I(1) Processes,”Journal of Business and Economic Statistics, 10, July 1992, pp. 321–35.

    Google Scholar 

  • Hansen, H.; Johansen, S. “Recursive Estimation in Cointegrated VAR Models,”Institute of Mathematical Statistics, 1, January 1993.

  • Harris, Richard.Using Cointegration Analysis in Econometric Modeling, New York, NY: Prentice Hall, 1995.

    Google Scholar 

  • Hendry, D.; Doornik, J. A. “Modeling Linear Dynamic Econometric Systems,”Scottish Journal of Political Economy, 45, 1994, pp. 1–33.

    Google Scholar 

  • Hooker, Mark A. “What Happened to the Oil Price-Macroeconomy Relationship?,”Journal of Monetary Economics, 38, 1996, pp. 221–2.

    Google Scholar 

  • Johansen, Soren. “Determination of Cointegration Rank in the Presence of a Linear Trend,”Oxford Bulletin of Economics and Statistics, 54, 1992, pp. 383–97.

    Google Scholar 

  • __.Likelihood-Based Inference in Cointegrating Vector Autoregressive Models, New York, NY: Oxford University Press, 1995.

    Google Scholar 

  • Johansen, Soren; Juselius, K. “Maximum Likelihood Estimation and Inference on Cointegration: with Applications to Demand for Money,”Oxford Bulletin of Economics and Statistics, 52, May 1990, pp. 169–210.

    Google Scholar 

  • Jones, C. T. “A Single-Equation Study of U.S. Petroleum Consumption: The Role of Model Specification,”Southern Economic Journal, 59, April 1993, pp. 687–700.

    Google Scholar 

  • __. “On the Estimation of Short- and Long-Run Elasticities in U.S. Petroleum Consumption: Reply,”Southern Economic Journal, 62, January 1996, pp. 788–91.

    Google Scholar 

  • Kremers, Jeroen J. M.; Ericsson, Neil R.; Dolado, Juan J. “The Power of Cointegration Tests,”Oxford Bulletin of Economics and Statistics, August 1992, pp. 325–48.

  • Osterwald-Lenum, M. “A Note With Quantiles of the Asymptotic Distributions of the Maximum Likelihood Cointegration Ranks Test Statistics: Four Cases,”Oxford Bulletin of Economics and Statistics, 54, August 1992, pp. 461–72.

    Google Scholar 

  • Pagan, A.; Ullah, A. “The Econometric Analysis of Models with Risk Terms,”Journal of Applied Econometrics, April 1988, pp. 87–105.

  • Park, J. Y. “Canonical Cointegration Regressions,”Econometrica, 60, 1992, pp. 119–43.

    Google Scholar 

  • Park, J. Y.; Choi, B. “A New Approach to Testing for a Unit Root,” working paper, 88-23, Cornell University, 1988.

  • Pesaran, Hashem H.; Pesaran, Bahram.Working with Microfit 4.0: Interactive Econometric Analysis, Cambridge, United Kingdom: Camfit Data, 1997.

    Google Scholar 

  • Phillips, P. “Spectral Regression for Cointegrated Time Series,” in W. Barnett, ed.,Nonparametric Methods in Economics and Statistics, Cambridge, MA: Cambridge University Press, 1990.

    Google Scholar 

  • Phillips, P.; Hansen, B. “Statistical Inference in Instrumental Variables Regression with I(1) Processes,”The Review of Economic Studies, 57, January 1990, pp. 99–125.

    Google Scholar 

  • Solo, Victor. “Errors in Variables and Cointegration,”Econometric Theory, 11, 1995, pp. 60–80.

    Google Scholar 

  • Stock, J. H. “Unit Roots and Trend Breaks,” manuscript, Harvard University, 1992.

  • Stock, J. H.; Watson, Mark. “A Simple Estimator of Cointegrating Vectors in Higher Order Integrated Systems,”Econometrica, 61, July 1993, pp. 783–820.

    Google Scholar 

  • White, H. “A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity,”Econometrica, May 1980, pp. 817–38.

Download references

Author information

Authors and Affiliations

  1. Texas A&M University at Commerce, USA

    A. C. Arize

Authors
  1. A. C. Arize
    View author publications

    You can also search for this author in PubMed Google Scholar

Rights and permissions

Reprints and permissions

About this article

Cite this article

Arize, A.C. U.S. petroleum consumption behavior and oil price uncertainty: Tests of cointegration and parameter instability. Atlantic Economic Journal 28, 463–477 (2000). https://doi.org/10.1007/BF02298398

Download citation

  • Issue Date:

  • DOI: https://doi.org/10.1007/BF02298398

Keywords

Search

Navigation